10 Biggest Financial Mistakes Doctors Make

[Editor’s Note: The following was originally published as one of my recent columns for ACEPNow. Don’t be fooled into thinking that a high-income makes you immune from financial consequences. Learn from and avoid the mistakes of others and you’ll be on the right path to achieving your financial goals.]

Q. In medicine, it is best to learn from the mistakes of others, as evidenced by morbidity and mortality conferences. What are the big mistakes doctors make when it comes to their finances?

A. Physicians earn relatively high incomes, but that doesn’t make them immune to financial missteps. Avoid these 10 errors:

10 Biggest Financial Mistakes of Doctors

1. Financial Illiteracy

The biggest mistake doctors make is simply not paying sufficient attention to their finances. In our 401(k) world, we each have a second job as a pension fund manager, whether we like it or not and whether we’ve been trained to do it or not. You (together with your partner) are your family’s chief financial officer(s). Your family is like a business, with various sources of income and various expenditures. If you manage it well, it will be profitable and will support you long after you’ve stopped working. If you do a poor job, you will reap the consequences. The cavalry isn’t coming. It’s up to you.

2. Growing Into Income Too Quickly

This is a real problem for emergency physicians, who generally hit their maximum lifetime income shortly out of residency. If their spending grows just as quickly as their income, they have missed out on the very best way to build wealth as a doctor—that is, living like a resident for the first two to five years out of residency and using the difference between attending and resident incomes, and the accompanying lifestyle, to pay off student loans, save for a down payment on a dream house, and catch up to their college roommates with their retirement savings.

3. Not Saving Enough

Even after the “live like a resident” period, a typical physician should save approximately 20 percent of their gross income for retirement. No amount of fancy investing can make up for inadequately funding the portfolio. An adequately funded portfolio, on the other hand, can make up for a plethora of investing mistakes.

4. Inadequate Insurance

Physicians should insure well against financial catastrophes, such as professional and personal liability, illness, injury, disability, death, and loss of expensive property. Too many physicians with family members relying on them financially carry inadequate term life and disability insurance. Too many doctors only carry the state-required minimums on their auto liability policies. Bad things happen regularly, and they can happen to you.

5. Mistaking Whole Life Insurance for an Investment

Nearly every physician will have whole life insurance pitched to them at some point in their career. All too often, the physician falls for it. Although there are some niche uses for this insurance product, it was inappropriately sold to the vast majority of physicians who have purchased it. The ongoing high premiums prevent these doctors from utilizing better investments, paying off their student loans, and sometimes even carrying an adequate amount of term life insurance! Treat the purchase of whole life insurance like you would evaluate a potential spouse. It’s either until death do you part, or it’s going to cost a lot of money to get out.

6. Choosing the Wrong Adviser

Most physicians want and need at least some assistance from a high-quality financial adviser. However, the key is to get good advice at a fair price. Good advice comes from a competent fiduciary, fee-only adviser who understands the unique financial situations physicians find themselves in. A fair price is a four-figure amount per year. If you are paying more than that, know that high-quality advice is available for less than you are paying. Keep looking until you find it, even if your current adviser is a good friend or family member.

7. Not Understanding Their Retirement Accounts

It is critical you become an expert in the retirement accounts available to you. If you are an employee or in a partnership, actually read the 401(k) plan document the employer is required to provide you if asked. Know how the plan works, whether there is an employer match, what the investment options are, and what fees you can expect to pay. Your employer may provide other retirement accounts such as a 403(b), 457(b), or defined benefit/cash balance plan. Also become familiar with a personal and spousal backdoor Roth IRA and a health savings account. Independent contractors and those who moonlight should use an individual 401(k) instead of a SEP-IRA and can even consider using a personal defined benefit/cash balance plan. These retirement accounts lower your taxes, boost investing returns, facilitate estate planning, and, in most states, protect your assets from creditors.

8. Buying Individual Stocks

Investing in individual stocks is an example of uncompensated risk. Any risk that can be eliminated through diversification is by definition uncompensated. Mutual funds provide diversification (plus liquidity and professional management) and therefore less risk than individual stocks. Physicians are very unlikely to select stocks well enough to beat the market averages in the long run and are generally best served by using low-cost, broadly diversified mutual funds.

9. Using Actively Managed Mutual Funds

The literature is quite clear that, over the long run, a low-cost, passively managed (index) mutual fund will outperform 80–90 percent or more of its actively managed peers. Trying to beat the market is a loser’s game; you actually win by not playing. Each year, some mutual fund managers will beat the market, but you are just as unlikely to succeed at choosing those managers a priori as they are to repeat their past performance.

10. Getting Burned by Exotic Investments

Physicians, as accredited investors by virtue of their high income, can invest in many investments not available to the general public. Each investment must be evaluated carefully on its own merits. A physician need not stray from boring old stock and bond index mutual funds to succeed financially, but should you do so, the principles of cautious due diligence and diversification still apply. If it sounds too good to be true, it probably is. Remember that business school professors refer to bad investments as “deals that can only be sold to doctors”.

28 comments

I had the opportunity to give my first “investment 101 talk” to my residents the other day. I highlighted a bunch of the things mentioned in this post. It seems so simple now, but for so many starting out this is all new to them.

In my talk, I showed them my last paycheck as a resident and first as a new attending. They “oohed and awed” over the number. I then showed them a typical attending physician’s lifestyle inflation, how much they would need to save each year to retire by age 60, and how those two things are often incompatible. That little exercise taught them a lot about the mistakes you mention here.

Hopefully, you’ll be getting forty new White Coat Investor book purchases at some point, too!

Out of that checklist of mistakes I can honestly say I committed 6 of them initially (the ones I didn’t fall for were whole life insurance, actively managed stocks, getting burned by exotic investments, and not having enough insurance).

It was in my early 40s that I corrected these mistakes and really made a lot of progress towards FI. A high income can rapidly dig you out of the initial whole if you just recognize it and then focus on the right things.

Still on track to retire very comfortably at least a decade before traditional retirement but if I had followed these rules from the get go could have already done it (I’m 47).

Jim I think you left out probably the most important step and that is choose the right partner. Few things on the planet can reduce your wealth by half or more in such a short time as a divorce (or a partner not on the same financial page as you). I consider that one my biggest mistake.

Oh yes…I made a few mistakes early on, like betting on obscure tech companies after selling Cisco shares then being spanked by the tech downturn of 2001.
Then I moved to get away from the medical madness in California during the 1990’s- 2000’s. I was then presented with the opportunity of a lifetime….investing in a Surgery Center. I used proceeds to buy additional shares. Towards the end I was making 680% of my original investment. It funded 75% of my retirement, my kids entire education including one son through medical school, all mortgages including my office building and an uptick in our lifestyle. When I sold my shares it funded an office building I built for a Title Company and an investment in a Surgery Center Management CO. that, along with leasing my medical office to our hospital, provides me a more than adequate retirement. I do not plan to dip into my 401k or social security until I am 70 1/2.
I was able to retire at age 62 when I could not reach a palatable agreement with our hospital. The hospital eventually let go of the physician they hired to replace me and I am going back to work part time after reaching an agreement that is more than palatable. I still have more to give even though financially I do not need to work.
Yes, I was fortunate, lucky, etc. I would definitely advise saving 20% of your gross income. The last 10 years of practice, I saved 30%.
I also recommend looking beyond the stock market. Some experts predict you can expect an overall return of 4-5 % after retirement with conservative investments. My rate of return with commercial property and my investment in the Surgery Center Management Company is 8-9 %. That does not take into account the appreciation potential of the properties. Also, in contrast to a 401k retirement fund, you have a much greater chance of having a legacy you can leave to your progeny, if that is important to you.
Thus, be open to other investments as long as they do not look too good to be true. I was a bit nervous when I first invested in the surgery center because there was no proven track record. But, I saw great potential and even borrowed money to invest. What has truly amazed me is how reluctant many physicians were in investing in the surgery center after it had shown significant profitability. In a way it was like winning the lottery and turning down the proceeds. Stay open to opportunities and do your due diligence.
I won’t say good luck. How about saying I hope you have intelligent luck.

In my main retirement account, I’m still down from January by $46,000. It’s not the markets fault. About $25,000 of that is from individual stocks I picked that have underperformed.

I think I’m done picking individual stocks. I bought Blackrock Financial at like $577 a share and it’s at $400.

Financials have been spanked recently along with Amazon that I bought that at $1800 ( its at $1685).

It’s been a steep learning curve since I took back control of my money in November 2017.

Of course I have saved $12,000 in fees, but made up for that by making rookie errors. I’m going back to basics. My portfolio is too complicated now. A third of it is a hodgepodge.

53% US Stock, 5% International stock, 14% US bonds (primary THOPX), 3% international bonds, 14% “alternative” (Mostly REIT), and 11.5% cash. At least I haven’t been selling on the drops. I need to do a much simpler re-allocation and leave it alone…

I “lost” over 60 K in about two weeks, but that left over 500K in gains and since it is only on paper who cares. Now being retired I want my dividends to show up on time and in the appropriate amounts, mostly nothing else matters to me. I foolishly did not buy Apple at 100 some time ago, that “mistake” really did not effect my life other than to learn not to be so hesitant.

Good list. Number 11: Poor personal choices. Divorce and other similar personal situations can be deveststing emotionally and financially. You should put the most thought into those types of choices to be successful.

Many of these mistakes are made by almost every person with investable wealth. Now I disagree with the idea that buying individual stocks is a mistake all the time. Sure you spread the “risk” but if you can get individual stocks that meet your desires you avoid the failures. I only have individual stocks, I don’t recommend it for others, but it works well for me.

Nice article Jim! Add your 10 investment mistakes to the list of 50 investment mistakes that I have seen people make over the years and we’re well on our way to helping a whole lot of people avoid basic mistakes if they just take a little time read your article. Thanks for everything you do to educate investors, especially doctors, as they are often the investors that are targeted with scams, etc. I hope you don’t mind Jim, but below I posted a link to the other 50 investment mistakes I referenced above.

Then I hope they do what I say and that’s negotiate a four figure price if they use an advisor or else learn to do it themselves competently. Frankly, what I have found is that when people starting caring about the price of the advice they’re halfway to becoming do it yourselfers anyway.

Agree with the writers above who noted that the wrong partner can be THE biggest financial mistake you can make. It certainly was for me. I went from net worth of negative 500K at the end of my first marriage to net worth positive 500K six years later with Husband 2.0. First husband said we couldn’t afford to invest, we didn’t know enough about it and could lose money, didn’t want to hear about real estate investing, and spent every dime he made. Now at age 63 he is scrambling to catch up and realizing he may never be able to retire. With second husband, through pooling of resources, aggressive saving and investing, leverage of personal real estate and pursuit of side real estate ventures, we are in great shape for the long-haul. What I wish I knew then!

I commend you on the list! I’d like to add to #1 – Financial is not just your investments. Financial literacy in your practice is paramount. without it you won’t have anything to invest. So many physicians turn their entire company over to an office manager and don’t want to be bothered with the operations. Or, they join a group and let someone else “run the business things”. They are then surprised that the practice is failing, or someone stole money/vacation/etc. BE BOTHERED! It is your livelihood. Spend some time understanding the business of medicine. From Billing to Expenses and everything in between. Review the data. If you don’t understand it – get someone outside the practice to review with you.

Amazes me how many private practices pay way too much for billing services- I help a friend sell his billing services (he runs a successful EHR company). Called someone last week in Cali that pays 8%! Its crazy – I told him we’d charge 3.5-4% and he didn’t believe me. Sad to think he is working extra because someone is fleecing him .

At the same time people drive and extra 1/2 mile to save 10 cents a gallon on gas- so bizarre.

People negotiate hard on purchase price of home but wont fight for best rate from mortgage brokers.

That sort of thing happens in business all the time. Part of being a good businessperson is simply negotiating and knowing where you can lower costs. If you’ve never paid too much or charged too little for something, you haven’t been in business long.

Great post, however I think differently about Mutual Funds, as I am a fan of dividend producing stocks and reinvesting the dividends. I think if you’re close to retirement, mutual funds are great. If you’re 20 years away from retirement, I think a more being a little more aggressive with dividend producing stocks is prudent.

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